The year's first convertibles hit the market in force

Taiwan LED chip maker Epistar raises $280 million, while Bangkok mass transit operator BTS Group sells $327 million of baht-denominated CBs and London-listed Essar Energy aims for at least $500 million from a deal targeted mainly at European investors.

Quite a few issuers and bankers were hoping to be the first to bring a convertible bond to market this year and yesterday saw at least two of them share that honour. In fact there were three Asian CBs in the market last night, but since one of them was targeted primarily at European investors and marketed against a live London price, it remained open in the early hours of the Hong Kong morning.

It was unclear why everyone felt yesterday was such a good day to raise money – there were also two blocks in the market – although some bankers said the fact that Monday was a poor day meant some of these transactions were pushed back a day. Clearly, one thing issuers learnt amid the market volatility last year, especially in the first half of the year, was to access the market while the opportunity is there. And now is a pretty good window. There is an inflow of capital into regional funds and with a lack of initial public offerings before the Chinese New Year holidays in early February, investors have time to look at the deals that are on offer – be they CBs or blocks.

The first CB to price was a $280 million upsized offering for Epistar Corp, a Taiwanese manufacturer of light emitting diode (LED) chips, which came with a zero coupon and attracted massive interest. The second was a baht-denominated but US dollar-settled transaction for BTS Group Holdings, the operator of Bangkok’s SkyTrain and bus system, that was also upsized to Bt10 billion ($327 million). Both deals were well received and covered within an hour.

The third deal in the market last night was a $500 million offering for Essar Energy, a private sector Indian company listed in London with interests in the Indian power, oil and gas sectors. The deal, which may be increased to as much as $675 million through upsize and overallotment options, was offered with a coupon between 3.75% and 4.25% and a conversion premium between 30% and 35% above the day’s volume-weighted average price. The five-year offering came with a three-year put and was supported by an equity swap, but according to sources, it was struggling to find enough buyers and by the time trading closed in London it was said to be offered slightly below par in the grey market. The share price came off by 4.4% during the day. Deutsche Bank, J.P. Morgan and Standard Chartered were joint bookrunners.


Epistar had no such issues. In fact the deal attracted so much demand that it prompted comments that it had been priced too cheaply. The fact that it traded up to 103 after pricing did indeed suggest that the issuer may have left a bit too much on the table. That said, it was important for the first deal of the year to go well, both for the issuer and the bank involved, and the strong interest was also supported by the availability of asset swaps and a positive equity story. Epistar was brought by Barclays Capital on a sole basis, making it the largest sole-led deal out of Taiwan since 2008.

The deal has a five-year maturity, but can be put back to the issuer at the third anniversary, and was launched at a base size of $250 million with a $30 million upsize option that was exercised in full. It offered no coupon or yield but a conversion premium of 25% to 30% over yesterday’s closing price of NT$102. There was virtually no price sensitivity and the premium was fixed at 30% for a conversion price of NT$132.60. The deal also came with an issuer call after three years, subject to a 130% hurdle.

According to a source, the Reg-S deal was well over 10 times covered and when the books closed after about three hours it had attracted more than 170 investors from across Asia and Europe. The overall quality of the orders was said to have been high. The level of asset swaps wasn’t disclosed, but was said to have been there for investors who wanted it. Still, the source said about two-thirds of the demand came from outright investors who came into the deal primarily for the equity story. The deal was marketed at a credit spread of 145bp and with a full dividend pass-through. With no stock borrow available, the stock borrow cost was assumed at 5%.

At the final terms, this gave a bond floor of about 92% and an implied volatility of 29.9%. The share price has been trending upwards since early September but is still slightly below the NT$113.50 level where it traded 12 months ago.

According to the term sheet, Epistar is to use the proceeds to buy equipment and machinery and to repay existing debt.

BTS Group

BTS was an entirely different trade, and not just because it offered rare CB exposure to Thailand and the appreciating baht. The CB had no credit hedge and no stock borrow, but came with a standby letter of credit issued by Bangkok Bank, which meant investors essentially looked at the deal as an exchangeable, with Bangkok Bank as the credit and BTS as the equity story they can convert into.

The intention with the CB was for BTS to bring down its cost of funding by repaying an earlier loan. Hence, the five-year deal, which can be put back after two years, was structured to incentivise early conversion. The conversion premium was fixed at launch at just 13% over the reference price of Bt0.82 (equal to Monday’s closing price), or at 14.4% over yesterday’s close of Bt0.81.

Also, the letter of credit expires after two years and the bonds will cease to pay a coupon at the same time. The initial coupon was fixed at 1% after being offered in a range between 1% and 1.5%. There is an issuer call after three years, subject to a 130% hurdle.

The share price had a strong run up in June and early July last year, but since then has traded largely in a range between Bt0.80 and Bt0.90.

The offering was about two-and-a-half times covered, which allowed the upsize option to be utilised in full, increasing the total deal size to Bt10 billion from Bt9 billion. Some 60-70 investors participated in the transaction, and not surprisingly, given the lack of stock borrow and credit hedge, and the fact that BTS is a small-cap stock that isn’t very liquid, most of the buyers were outright accounts. European investors were particularly happy to get exposure to Thailand – especially in the form of a CB with a moderate premium and through an attractive credit, i.e. Bangkok Bank.

Morgan Stanley was the sole bookrunner, after pushing ahead of Bank of America Merrill Lynch which had also been working with the company on a deal. Bangkok Bank and Bualuang Securities acted as co-managers.

The bonds were marketed at a two-year credit spread (referring to Bangkok Bank) of about 150bp to 160bp and came with full dividend protection and an assumed stock borrow cost of 5%. At the final price this gave a bond floor of 93.5% and an implied volatility of 23%.

Just after midnight Hong Kong time when the deal was being priced and allocated there was no real activity in the grey market, although sources said there were supposedly some bids slightly above par.

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